The Tax Administration Act No 28 of 2011 (“the Tax Admin Act”) which (except for a few sections) came into effect on 1 October 2012, has introduced new rules governing reportable arrangements.
Simplistically, a reportable arrangement is an arrangement that has been listed as such under section 35(2) of the Tax Admin Act or one in respect of which a tax benefit is or will be or is assumed to be derived and which contains certain other elements which are set out in section 35 of the Tax Admin Act.
Similar to the repealed reportable arrangement provisions under the Income Tax Act No 58 of 1962 (“the Income Tax Act”), the Tax Admin Act imposes a duty on participants, namely the promoter of the arrangement or a company or trust which derives or assumes that it will derive a tax benefit or financial benefit by virtue of the reportable arrangement, to disclose the pertinent details of the reportable arrangement to SARS in the prescribed manner and within a prescribed period.
Some of the most substantive changes to the reportable arrangements provisions as introduced by the Tax Admin Act relate to the penalties which may be imposed in the event of the failure by a participant to make disclosure to SARS as prescribed.
Section 212 of the Tax Admin Act states that for each month, but up to 12 months, that the participant fails to report the reportable arrangement, they will be liable for a penalty of R50 000, in the case of a participant (other than the promoter) or R100 000 in the case of the promoter.
The amount of the above-mentioned penalty will be doubled, if the anticipated tax benefit for the participant by reason of the reportable arrangement exceeds R5 000 000. In addition, the penalty will be tripled if the anticipated tax benefit exceeds R10 000 000. Therefore a monthly penalty of R300 000 (for the promoter) and R150 000 (for other participants) may be imposed by SARS for each month that the participants fail to disclose the reportable arrangement. Should the failure persist for at least 12 months, the penalty that the participants would be liable for may be up to R1 800 000 or R3 600 000 for promoters.
This is a drastic change, as under the “old” Income Tax Act reportable arrangement provisions (section 80S), the reportable arrangement penalty was a maximum of R1 million, which could be reduced by the Commissioner in certain circumstances.
Under section 217 of the Tax Admin Act, once a penalty assessment has been issued by SARS for the reportable arrangement penalty, the person aggrieved by such penalty assessment may submit a request for the remittance of the penalty.
However, section 217 provides that SARS may only remit the penalty or a portion thereof up to R100 000 if satisfied that (1) reasonable grounds exist for the non-compliance and (2) the non-compliance has been remedied. Of importance in this regard, is that SARS’ powers of remission under section 217 are limited to the “first incidence” of non-compliance. It is not clear whether the “first incidence” refers to the first failure by a participant to disclose any reportable arrangement or if it refers to the first month of the failure by a participant to disclose a particular reportable arrangement.
Another possible avenue for the remission of the reportable arrangement penalty may be found in section 218 of the Tax Admin Act. This section provides that when SARS receives a remittance request for the remission of a penalty, it may remit the penalty if satisfied that one or more of the listed exceptional circumstances rendered the person on whom the penalty was imposed unable to comply with the relevant obligation under a tax Act is present.
Therefore, should exceptional circumstances exist for an aggrieved person’s failure to disclose a reportable arrangement, SARS would have the power to remit the penalty, regardless of whether it is a “first incidence” or not. The exceptional circumstances are listed in section 218(2) of the Tax Admin Act.
What is not clear under section 218 is the extent of SARS’ power of remission under section 218. In particular, as no limits are imposed in section 218, would SARS be empowered to remit the whole amount of the penalty if the criteria set in this section are satisfied? One would hope that the answer to this question is in the affirmative as this would be a more favourable outcome for taxpayers.